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JKCPA, CPA
Category: Finance
Satisfied Customers: 5882
Experience:  Bachelors degree and CPA with Accounting experience.
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The formula for calculating cost of goods sold is beginning

Customer Question

The formula for calculating cost of goods sold is:

beginning inventory
+ gross purchases
- returns, allowances and discounts
+ freight in
= cost of goods available for sale
- ending inventory
= cost of good sold

(Note that freight-out charges are a selling or marketing expense which are not included in the calculation of cost of goods sold)

Above is the complete formula, however often the abbreviated formula is used:

beginning inventory
+ purchases
= cost of goods available for sale
- ending inventory
= cost of goods sold

this formula can be rearranged if you need to calculate the ending inventory instead of the cost of goods sold:

beginning inventory
+ purchases
= cost of good s available for sale
-cost of goods sold
= ending inventory

One of our modules this week requires us to calculate cost of goods sold assuming a FIFO or LIFO cost flow. Here is a simple example and if you can understand this, then you should have no problem with the module. Suppose purchases were as follows (in chronological order):

1 unit at \$1
1 unit at \$2
1 unit at \$3

If two units are sold then what is the cost of goods sold and the cost of ending inventory assuming FIFO cost flow?

And what is the cost of goods sold and the cost of ending inventory assuming LIFO cost flow?

And another example using the information above: if two units are in ending inventory then what is cost of good sold and cost of ending inventory assuming FIFO cost flow?

And assuming LIFO cost flow?
Submitted: 5 years ago.
Category: Finance
Expert:  JKCPA replied 5 years ago.
Hello,

If two units are sold then what is the cost of goods sold and the cost of ending inventory assuming FIFO cost flow?

Cost of goods sold = \$1+\$2 = \$3 (the first 2 units were sold)
Cost of ending inventory = \$6 - \$3 = \$3 (only the last unit remains in inventory)

And what is the cost of goods sold and the cost of ending inventory assuming LIFO cost flow?

Cost of goods sold = \$2+\$3 = \$5 (the last 2 units were sold)
Cost of ending inventory = \$6 - \$5 = \$1 (only the first unit remains in inventory)

And another example using the information above: if two units are in ending inventory then what is cost of good sold and cost of ending inventory assuming FIFO cost flow?

Cost of goods sold = \$1 (only the first unit was sold)
Cost of ending inventory = \$6 - \$1 = \$5 (the last 2 units remain in inventory)

And assuming LIFO cost flow?

Cost of goods sold = \$3 (only the last unit was sold)
Cost of ending inventory = \$6 - \$3 = \$3 (the first 2 units remain in inventory)

Hope this helps!
JKCPA, CPA
Category: Finance
Satisfied Customers: 5882
Experience: Bachelors degree and CPA with Accounting experience.
Customer: replied 5 years ago.
what is the difference between the periodic and perpetual methods of inventory valuation? Which was more common in the past and which is more common today and why? What are some of the advantages and disadvantages of each? Which cost flow assumption (LIFO, FIFO or weighted average) is the same under either method?
Expert:  JKCPA replied 5 years ago.
Hello,

Thanks for the accept.

Please post these additional questions in a separate new post so another expert may help you. I won't be able to answer these since I will be out the next few days.

Thanks.

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